When Cliff Lewis became chairman and chief executive of Currenex in January 2003, he signalled his intention of reinventing the company. It would no longer be simply a high-technology utility for the buy side but rather a broader foreign exchange marketplace run on a for-profits basis. Few at the time gave Lewis any real chance of success, especially as it was widely predicted that the multi-bank platform space was ripe for consolidation. This contraction of trading venues has yet to occur and it might be that Currenex’s sale revives the topic, at least as a debate even if not as a reality. What is clear is that with the sale of the company for $564 million in cash to State Street Corporation, Lewis’s early confidence in his ability to turn it around has been more than justified.
Although it was an open secret that Currenex was auctioning itself, the price has stunned many in the FX market. After all, it is barely a year since HotspotFX was dispatched by its owners for a mere $77.5 million to Knight Financial. And EBS, without question the biggest spot FX middleman in the market, was sold to Icap for about $800 million.
Patience pays
Perhaps, though, it would be better to ask why Hotspot and EBS were sold so cheaply, rather than to question why Currenex fetched so much. There was certainly something hasty in the disposal of Hotspot, and EBS went on the cheap because there was only one buyer bidding for it. In contrast, Currenex was able to bide its time and it is known that it attracted at least two serious and wealthy suitors.
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“The two platforms are totally complementary, so compellingly so that we simply had to buy it” Simon Wilson-Taylor, State Street |
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As far as Simon Wilson-Taylor, senior managing director and head of State Street’s multi-asset class Global Link trading network, is concerned, what made the deal so compelling was that there is so little overlap in what Currenex and his company provide. FX Connect, State Street’s electronic platform, is widely described as cumbersome; the system’s real strength is its post-trade infrastructure. Wilson-Taylor is reluctant to admit this but he happily concedes that Currenex offers State Street something new. “Seventy-eight percent of FX volume by value from this sector [institutional] is done through FX Connect,” he says. “But it is a process-driven product rather than an active trading platform. That [active trading] is what Currenex offers. The two platforms are totally complementary, so compellingly so that we simply had to buy it.” Lewis argues that those who have questioned the price have failed to realize how far Currenex has moved on. “Buying Currenex is not just about buying into a high-growth story,” he says. “The price paid represented that, but also the fact that the company is a real technology asset. The problem people have is that they are still thinking about how the company was three years ago.”
Commenting on the deal, Goldman Sachs says that Currenex’s revenues have doubled in each of the past three years, although it fails to say that this growth has come off a fairly low base. According to Goldman, Currenex was priced on 28 to 30 times 2007 earnings. Goldman’s estimates look too high. The deal is expected to be earnings neutral in 2007 and slightly accretive in 2008, and with State Street trading on a P/E ratio of 22, the implication is that Currenex will report a post-tax profit of about $25 million this year.
Sharks in the tank
Lewis believes Currenex will thrive even more under its new owner. “To be successful [in FX], you have to get as much non-correlated flow into the system as possible,” he says. “Just having sharks in the tank is not a successful model. We want to have the sort of clients that market makers want to provide liquidity for.”
Lewis believes the combination of State Street’s strength in the institutional sector and Currenex’s penetration right down to retail aggregators will deliver this. “Put our two client bases together and you’ve got the best flow in the market,” he says.
